Thursday, October 02, 2008

Why the Bailout is Bad for America

From Dan Mitchell at Cato:• The bailout is bad for the economy.• The bailout repeats the mistakes Japan made in the 1990s. • The bailout will increase corruption in Washington.• It rewards executives and companies that made poor choices.• The bailout will encourage imprudent risk in the future. Bottom Line:When government tries to redistribute wealth from rich people to poor people, it causes economic damage by discouraging productive activity by the most successful and by discouraging productive activity from those who are lured into government dependency. The proposed bailout is even more pernicious. It would redistribute wealth from poor people to rich people, and simultaneously encourage reckless behavior by recipients and impose an immoral burden on those that behaved responsibly.HT: Don Boudreaux

22 Comments:

Since companies with mortgage backed securities are getting a substantial haircut, what makes it a bailout?

If there are "innocent" companies with MBSs along with the villains, why should they tank, too?

Isn't the credit system that is being re-established, not so much the bad players?

While some of the "value" being lost was speculative, a lot of the value that will be lost, while not "real" in the concrete sense, does put useful energy into the market. Take it out and doesn't the smaller market unnecessarily lowers the standard of living of people who had no dog in this fight?

I've been amazed at the substantial lack of pragmatists in this situation. It seems that for most economists and conservatives, the notion that markets might work well on their own most of time but very rarely could need some kind of interventionist help to get out of a bad equilibrium, well this notion seems totally incompatible with their thinking processes. I'm not sure if it's because so few have actual experience with capital markets, or if they're just ultimately ideologues in the end.

In any case, looking at what's happening in the money and debt markets and thinking about links from that to the real economy, it sure seems that if something systematic could be done to reduce investor risk aversion and at not too high of an expected cost [cost NOT investment], that could well be a good thing. Yet, so few seem to look at it this way. Strange...

Let's take a look at another bailout - the $25 billion one the Congress passed for the auto industry. Jim Hamilton looked at the current state of the auto industry today, but the key insight was provided by "Ben" in the comments, emphasis mine:

I saw the VP of Chrysler on TV this morning. He was explaining what a Good Thing it was for them to have this down turn in sales because it gave them time to retool and start designing cars that have decent gas mileage. It wasn't their fault that they didn't think ahead: they just respond to what the public wants. But he also described the governments $25 billion as a great motivator so maybe they are a little less one-dimensional than they appear...

The Chrysler VP's sentiment toward the auto industry bailout would pretty much track Dan Mitchell's view on all points.

Scroll down to the next comment in Jim's post for my view of how beneficial the bailout package would be for GM....

SBW : I'm curious about your assertion that MBS were getting a 'substantial haircut' under the plan. I was under the impression that there would be no or minimal haircut of these 'illiquid' assets. I cite revised interpretation of accounting standards (elimination of mark-to-market) combined with the bailout bill's non-reviewable and unspecified asset pricing.

The government/treasury will be buying these securities at market values. As Warren Buffett has repeated over and over, the government is not "spending" this money, they are "investing" it. The government stands a very good chance of making money with these investments at the end of the day.

Matt, if I understand it correctly (with the caveat, who does) the "assets" would be acquired at a steep discount -- their market value, marked to market, isn't much. Since they were acquired initially for a higher price, the firm holding the assets would have taken a haircut -- the difference between the purchase price and the sale price.

But Treasury, holding them to maturity, or selling them on better evaluation, would earn much more.

"• It rewards executives and companies that made poor choices.• The bailout will encourage imprudent risk in the future. "

yep.

a better plan would have been govt purchase of preferred stock to recapitalize banks and insurance companies. this has the great advantage of saving the companies while at the same time "dis-rewarding" them by giving a haircut to stock holders (and bondholders? not sure. anyone know?)

As Warren Buffett has repeated over and over, the government is not "spending" this money, they are "investing" it.

Buffet is a socialist. I don't trust anything he says on the matter of governments "investing" anything. "It's an investment" is often used to describe public works boondoggles, where it is an equally misleading example of doublespeak.

Socialism: a system of society or group living in which there is no private property b: a system or condition of society in which the means of production are owned and controlled by the state

Warren Buffett: perhaps the most successful value investor the 20th century

It think its strange that a socialist would waste his time with private investments the way Mr. Buffett has. Buffett has put his money where is mouth is with the recent credit crisis through private, not public, investments in Goldman, GE, and the monoline insurance industry. If he truly was a socialist, why wouldn't he have waited for government intervention with these companies?

Is it your belief that the markets are beyond repair and that an injection of liquidity could have no positive benefits. If thats the case, maybe its you who is the socialist.

It think its strange that a socialist would waste his time with private investments the way Mr. Buffett has. Buffett has put his money where is mouth is with the recent credit crisis through private, not public, investments in Goldman, GE, and the monoline insurance industry.

He's wealthy opportunist. So what? Many socialists are capitalists in their day jobs. Just look at the guys who run Google. Heck, look at how Wall Street apportions its political donations. Listen to his politics. He's very much a man of the left. He's all for high estate taxes, high income taxes, redistributionist taxation, and industrial policy. He's made pronouncements about income taxes that show he doesn't understand (or is lying) about how our tax system works, in order to agitate for these freedom and wealth destroying ideas. Either he doesn't care how much wealth he'll lose, or he (like many socialists) expects his hand to be on the levers of power, insulating him from the negative effects of the policies he espouses.

If a bailout is the ONLY answer, you would be correct. There are many different proposals to deal with this crisis that do not include buying assets of dubious quality at an unspecified price to try to put a floor under the market.

Given that the Treasury would not be able to buy all of the assets, would the government be able to stabilize the market or would it be just another in a series of stopgaps.

This particular "investment" would need to be administered. Holding to maturity is not a zero cost activity. If you factor in the ongoing costs in addition to the purchase price, 700 billion is likely not the true cost.

Like the old adage says, government budgeting involves taking the original estimate, doubling the figure and adding a zero.

We might also add that it harms competition by preventing smaller firms from gaining market share due to bad decisions by their larger competitors.

Oh, on a side note, as proof that credit will no longer be availale without a bail out...UBS turns a corner and predicts 3Q profit for the first time in a year and a half. Further, they expect profits for '09 as well.

The good bit is further down the page: the link between body weight and dementia.

OBH,

There is a possibility that Warren Buffett is doing what most democrats do...you can listen to a democrat with a six figure salary who gives $362.00 per annum to charity (yep, 0.2% of his salary) to charity talking about his working class credentials in this evening's presidential debate.

At the convention, some of these dems had to go back to 2 generations for their "of the people" credentials.

Are you surprised that Warren Buffett dons the occasional hair shirt? Only a rich dem like WB can argue for death taxes. Do you seriously think that he's a "taxes rock" kinda guy?

As credit spreads widened, he said he also realized this was a "Herbert Hoover moment, where he sat by and let a Wall Street crash turn into a Great Depression . . . There are times when free-markets stop and rational thinking goes out the window. It then isn't enough to be a laissez-faire conservative and let Rome burn . . . This bill is not perfect, but doing nothing is far worse than passing this bill."Republican Rep. Paul Ryan

Its one thing to advocate the benefits of the free markets, but some of you people (juandos) are both delusional and extremist.